Title Companies v. Attorneys

Once a home is under contract, and sometimes even before, buyers will be asked if they have a settlement agent in mind to handle their closing. Some buyers opt for attorneys, others request a title company to handle the closing, primarily to avoid the attorney fees. After all, the insurance is the same after the closing, so why pay any more for the same service?title ins.jpg

Fair question.

I have in front of me a 56 page document that was just released by CRA International, a national research organization that studied the HUD-1 costs across the country and tried to determine how much extra buyers spend on attorneys instead of going straight to the title company and closing it with them.

The argument that settlement companies have made is that attorneys are expensive and unnecessary for these transactions. Without competition, attorneys would force the price of home loan settlement sky high and the consumer would be punished. The attorneys argue that in fact it is the title companies that keep prices high. They claim that title companies may charge less in the form of a “closing fee” but they more than make up for that discount in the price of the insurance policy that they offer consumers. Attorneys are able to price title policies from different companies and that brings price down.

The study looked at 839 financings that occurred in a single 12 month period, and included 366 new home purchases and 473 re-fi’s. In the case of re-fi’s, there are occasions when the lender actually performs the closing. So, in Virginia for instance, 50% of the cases studied were closed by settlement companies, ~30% by attorneys and ~20% by the lenders directly. Across the entire study 60% were closed by settlement companies, 17.4% by attorneys and 22.7% by lenders.

The empirical evidence is that the attorneys are correct that title companies charge more for their policies, but they are wrong that it always costs more overall. The study showed that in states where Attorneys handle all the closings by law and the states where settlement agents are dominant the charges are roughly equal. There does not appear to be any influence that regulations have on the costs of closing a loan. In states, such as Virginia, where consumers have a choice, the numbers that make up the total for closing costs may be different, in the end, the costs are roughly equal.

The CRA study found that “High or low closing costs appear to be at least equally – and frequently more strongly – associate with a wide range of other factors (such as details of the loan, the characteristics of the state or loan area, and the characteristics of the borrowers);” Translation: While different loans cost different amounts to close, it is based on size of loan, credit score, local taxes (GRANTOR TAX!!!) and other factors, not who the settlement agent was.

So, what does an ambiguous study tell us about how buyers should choose their settlement agent? Very little. Instead, it says that the price conscious buyer isn’t going to save money. So the question that a buyer needs to ask is, “How will I best be served?” Given that settlement companies are not allowed to act as attorneys or provide legal advice in the case of legal issues arising, my advice is to stay with a local attorney who can represent you if you need it. The cost of bringing a lawyer on board down the road is much higher than having them with you from the start.

3rd Quarter Nest Report

Each quarter, as I hunker down with numbers, I get a little more ambitious. At the end of the process, I think, “I hope I didn’t include too much.”

This quarter is certainly no exception. The report expanded by over 100%. I have included far more information on condos, attached houses, and general macroeconomic conditions. The same information as in the past is available for the detached homes. All in all, I’d say it is the most comprehensive analysis available. Of course, I have a bias.

For those who wish to read the report, click here to grab a pdf version. I will be pulling out some items over the next few weeks to publish some more in depth items. Hope you enjoy.

Click here for the report.

City Assessment Data, Part 2

Originally Published February 8, 2009

OK, so I have continued playing with the City Assessment data and 2008 pricing… Read on for info on the ratio of assessments and sales prices. I had told a reporter that it was my gut belief that the majority of homes sold in 2008 in the city sold for less than assessed value. Well, I was wrong… but not by much…

Sales Prices to Tax Assessment

OK, here is what I really wanted to know when I started this. What percentage of homes sold for less than their assessed value in 2008?

First off, I had to take 10 of the 284 out of the study because they were assessed only on the land with no improvements, so they sold for more than their earlier assessments.

Of the 274 remaining city sales, 141 sold for more than assessment, 3 sold for assessment exactly, and the remaining 130 sales were below assessment.

Looking at those that sold below assessment. I fully expected to find a large number trading at a substantial discount to assessment; and I did. I found a total of 57 homes that sold at a discount of more than 10%. That represent nearly 20% of the city sales. A total of 91 homes sold at a discount of more than 5%, or 32% of the transactions.

Looking at those that sold above assessment, you find a similar curve. 63 homes (22%) sold for more than 110% of tax assessments, and 95 homes (33%) traded for more than 105% of assessments.

OK, here is the crazy part. When I then compare to 2009 numbers, There are 32 Homes that sold in 2008 whose 2009 Tax Assessment are MORE THAN $50,000 LESS than the sales price. Doesn’t it go to reason that if I pay $500,000 for a house, I believe its value to be …. $500,000… Apparently, the city does not think so. In fact, one home buyer from 2008, paid $705,000 for a home assessed at $470,300 in 2008 and his 2009 assessment did not go up a single penny. Quick math tells you that the city is missing more than $2,200 in tax revenue from that home owner alone.

If you take all the homes whose 2009 assessment is Less than the sales price minus $25,000 (55 homes) then you have a total loss of tax revenue to the city of over $36,450. This represents an average of more than $662 per home. Hmmm. You’d think the City would have figured this out.

And truth be told, while there were 141 homes that sold for more than assessment in 2008, by 2009, there were 146 homes whose assessments were less than sales price. Not sure how the City would respond to that.

Afordability Index

Originally Published January 31, 2009

I just saw an article from the NY Times that was addressing the affordability of housing across the nation. Click the follow through for the chart and some explanation. Interesting numbers. Could be very positive for the outlook.

Granted, these numbers come from the National Association of Realtors, who I try to quote as little as possible. They are always trying to spin things positively, and I respect their position, but not always impressed with their USAToday quality stats. This chart, however, got my attention for two reasons 1) Because the NY Times found enough interest to put it out there, and 2) Because it is a 35 year look at housing in America.

The NAR has taken a look at Median Income in America and compared it to the income needed to qualify for the Median home price in today’s market. So this looks at home prices, income, and mortgage rates. Back in the 80s when mortgage rates were 18%, the median family had only ~65% of the income needed to buy the median home. From 1989 until the run up in 2003, that number remained between 105% and 120%. As the prices went up in mid part of our current decade, the numbers dipped as low as 100%, but with mortgage rates lower than any time in 50+ years, the Median Family now has nearly 160% of the income necessary to purchase the median home.

This should mean that there is access to more and more first time home buyers to enter the market in the near future. It all relies upon consumer confidence now. Mortgage money is flowing. Wages support the purchase of new homes. The question still falls back on whether people are willing to take the plunge or not.

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